It was fascinating to see numbers recently released by J D Power, showing that the average USA vehicle transaction price has grown from $25,500 in 2008, to $28,300 in 2011. That's a gain of some 11%. If we poke around to get 2007 and preliminary 2012 numbers, we see something like a growth from $25,000 to $28,750, a gain of 15%. As JDP points out, the increase is due to a variety of factors, from reduced discounting, to sales of a richer mix of vehicles, and is due in some large part to better pricing discipline by the OEMs, aided by the tsunami-driven shortage of Japanese vehicles.

In any case, the reason I find these price numbers interesting is because of their interaction with demand (sales of cars). The industry has been moaning a lot lately about younger people not wanting to buy cars any more, or about "the new frugality" keeping sales suppressed. These things may be true, but let's also take into account good old Economics 101, and something called the price elasticity of demand. Put simply, as price goes up demand goes down, and elasticity measures the responsiveness of demand to price. An elasticity of 1 means if I cut price 10%,demand will rise 10%, everything else being equal. Experts vary a lot as to what the price elasticity of demand is for cars in the USA, but a consensus figure is around 1.2:if we cut price 10%, demand goes up by 12%. Let's apply this to the current market. We're probably at a 2012 demand (sales) rate of 14.5 million. If prices were cut 15%, so that we reversed the price run-up of recent years, demand would rise by 18% ( = 15 x 1.2 ). An 18% bump on 14.5 is… 17 million in sales! Back to the glory days of old…

The point is, this simple math indicates demand in the USA might indeed be MUCH healthier than the pessimists among us may say it is. If underlying demand is strong, then it is OEMs and dealers who, in "taking price" instead of "chasing volume," are holding actual sales down. (I realize I am grossly over-simplifying here: for example, I'm ignoring inflation and a bunch of other factors.) That is by no means a bad thing, as it is high time the industry started focusing more on profits and less on units. But it may mean we can't have our cake and eat it, too: if we are earning good profits because we are keeping prices up, then we can hardly also complain that volumes are low. Should anyone be daft enough to start up a price war again, volume will likely come speeding back. Even those supposedly car-averse "millennials" may drop their Zipcar memberships if they see $5,000 on the hood of a Kia any time soon!